CHAPTER 29

CAPITAL STRUCTURE IN ISLAMIC FINANCE

One of the institutions run sharia financial activity is sharia banks. Sharia banks is sharia
financial institutions that oriented on the profit. The profit of sharia banks obtained from the
difference between the income of the fund investment and costs are issued in certain period.
To obtain optimal results, sharia banks is required to perform the management of funds in an
efficient and effective, good over the funds collected from the community and the owner of
capital sharia banks.

Capital Management (Islamic Bank)

Capital is a factor that is very important for the development and progress of the bank as well
as maintaining the trust of the community. Every creation of assets have potentially to get profit
and also present a risk of loss. Therefore capital must also be used to keep the possibility of the
risk of loss on investment in assets, primarily from funds third parties or society. On a source
of bank capital gains can be obtained from a number of sources such as the founder and the
shareholders.

Function of Bank Capital

Bank capital is an important aspect of a business unit bank. According to Johnson and Johnson,
bank capital has 3 functions namely :
1. As a buffer to absorb operational losses and other losses.
2. As a basis for the determination of the maximum limit of credit.
3. As a basis of calculation for the participants in the market to evaluate the ability of the
bank are relatively to generate a profit.

Sources of Bank Capital

Capital Bank by George H Hempel, dkk. Is divided into three main forms namely loans
subordination, shares prefen, and common stock. Loan subordination consists of all forms of
liability blossom paid back in a certain amount of a certain period of time. Loans subordination
vary from capital notes until debenture with a longer period of time the length. The
determination of the sources of bank capital based on some important function performed by
the bank capital. For example, when capital must function provides protection against the
failure of the bank and then the most appropriate source is capital equity.
Capital Sources of Islamic Bank

The main source of sharia bank capital is the core capital and quasi-equity. Core capital is the
capital which comes from the owners of the bank, which consists of capital that submitted by
the shareholders, backup, and spider detained. While quasi-equity is funds recorded in the
accounts for the results (mudharabah). Core capital is functioning as a buffer and absorbing the
failure or loss of the bank and protect the interests of account holders hold (wadiah) or loans
(qard) especially on assets financed by capital and funds wadiah or qard.

Capital Adequacy of Sharia Banks

Banks that have good capital adequacy show indicators as a healthy bank. Because the capital
adequacy of the bank shows its situate which is expressed with a certain ratio. The level of
capital adequacy can be measured in a way :
1. Comparing capital with third party funds.
2. Comparing capital with risky assets.

Implementation of CAR for Indonesia Banking

CAR (Capital Adequacy Ratio) is an important aspect for the banking world. important aspects
for banking Indonesia, namely:

a. Understanding of Capital
Bank capital is divided into core capital and complementary capital. Core capital (tier 1)
consists of: (1) capital deposit, (2) share premium, (3) donation capital, (4) general backup,
(5) backup destination, (6) retained earning, (7) profit last year, (8) current year profit.
Complementary Capital (tier 2) consists of reserves that are formed not from profit after
tax as well as loans of equivalent nature with capital. in detail the complementary capital
may be:
1) Revaluation reserves of fixed assets.
2) Reserve for write-off of fixed assets.
3) Loan capital that has the characteristics:
- Not guaranteed by the bank concerned and equalized with capital and paid fully.
- Can not be repaid on the owners' initiative, without bi approval.
- Has the same position with capital this shoulder the bank losses.
- Interest payments may be deferred if the bank is in a loss state.
4) Subordinated loans that meet the following requirements:
 - There is a written agreement between the lender and the bank.
- Get approval from BI.
- Not guaranteed by the bank concerned.
- Minimum 5 years.
- Loan repayment must be with BI approval.
- The right to collect in the event of a liquidation in effect at the latest.

b. Procedures for Calculating Minimum Capital Requirements

Capital requirement calculation is based on risk-weighted assets (RWA). The asset in this
calculation includes both the assets listed in the balance sheet and the administratively
managed assets.

Risk-Weighted Assets (RWA) of Sharia Banks

RWA is the denominator of the CAR while capital is a shared factor (numerator) to measure
the capital ability to assume the risk on the asset. In an RWA at a syariah bank, it must first be
considered that the assets of a syariah bank may be divided into:

1. Assets funded by own capital, then the risk is borne by own capital.
2. Assets funded by profit-sharing accounts or mudaraba, then the risk is borne by the
account-sharing fund itself.